Resource Shuffling, Complementary
Measures and Competitiveness under
California’s Cap and Trade Market
Severin Borenstein
University of California, Berkeley
Professor, Haas School of Business
Co-Director, Energy Institute at Haas
Director, University of California Energy Institute
Member, Emissions Market Assessment
Committee
Comments based mostly on research with
Elizabeth Bailey, Jim Bushnell, Frank Wolak
and Matthew Zaragoza-Watkins
• http://ei.haas.berkeley.edu/power
Leakage vs. Resource Shuffling (Reshuffling)
• Leakage: Regulations cause economic activity to move
to less regulated regions without lessening pollution
problem.
• Reshuffling: Regulations cause buyers and sellers to
adjust their counterparties, without changing the
location of the economic activity.
• More flexible regulations can exacerbate these
problems
Figure 1
Supply of Abatement
Allowance
Price
$50
$40
Industrial Processes Changes;
Fuels consumption
$10.5
0
Complementary Costless
Measures
Reshuffling
Costly
Reshuffling
Offsets
GHG Reductions
Figure 1
Supply of Abatement
Allowance
Price
$50
$40
Industrial Processes Changes;
Fuels consumption
40 – 65 mmTons
$10.5
0
Complementary Costless
Measures
Reshuffling
475– 710 mmTons
Costly
Reshuffling
Offsets
GHG Reductions
Figure 2
Hypothetical Distribution of Abatement Demand (BAU minus
Allowances Outside Containment Reserve) vs Abatement Supply
Allowance
Price
$50
$40
$10.5
0
GHG Reductions
Figure 2
Hypothetical Distribution of Abatement Demand (BAU minus
Allowances Outside Containment Reserve) vs Abatement Supply
Allowance
Price
$50
Probability Density
$40
$10.5
0
GHG Reductions
Figure 2
Hypothetical Distribution of Abatement Demand (BAU minus
Allowances Outside Containment Reserve) vs Abatement Supply
Allowance
Price
$50
$40
Probability at
or below
Auction
Reserve Price
$10.5
0
GHG Reductions
Figure 2
Hypothetical Distribution of Abatement Demand (BAU minus
Allowances Outside Containment Reserve) vs Abatement Supply
Allowance
Price
$50
$40
Probability at
or below
Auction
Reserve Price
$10.5
Probability
of exhausting
Containment
Reserve
Probability
above lowest
Containment
Reserve Price
0
GHG Reductions
Figure 2
Hypothetical Distribution of Abatement Demand (BAU minus
Allowances Outside Containment Reserve) vs Abatement Supply
Allowance
Price
$50
$40
Prob. of Intermediate
Price
$10.5
0
GHG Reductions
Figure 3
Possible Density Functions of Allowance Price
Probability
Price = X
0
$10.50
$40
Allowance Price
$50
Supply of Abatement
Three Abatement Scenarios
• Low Availability:
– 475 MMT from comp. and low price policies
– Medium price response
• Medium Availability:
– 583 MMT from comp. and low price policies
– Low price response
• High Availability:
– 710 MMT from comp. and low price policies
– Medium price response
Figure 5
Allowance Price Probabilities by Scenario
100%
9%
90%
80%
70%
16%
12%
3%
17%
22%
11%
8%
1%
8%
1%
13%
13%
3%
5%
1%
5%
91%
89%
S7: Med
Demand
S8: 75th
Demand
5%
1%
9%
4%
1%
10%
1%
10%
3%
3%
60%
50%
40%
69%
67%
65%
S1: Med
Demand
S2: 75th
Demand
S3: Max
Demand
30%
82%
80%
S4: Med
Demand
S5: 75th
Demand
86%
76%
20%
10%
0%
Low Abatement/Allowance Supply
S6: Max
Demand
S9: Max
Demand
Medium Abatement/Allowance Supply
High Abatement/Allowance Supply
pr(floor)
pr(abovereserve)
pr(upslope)
pr(inreserve)
Policy Implications
• Small, but real chance of reaching and exhausting
allowance reserve before 2021.
– Specific policies to respond to potential exhaustion of
reserve are needed. CARB is working on these.
• Allowance revenues could fall well below previous
forecasts.
– Floor price most likely outcome
– Lower sales at the floor price
• Prices could be volatile as market updates to new
information
– Small swings in BAU or abatement could lead to large
prices swings